AVNET INC annual report, FY2021

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Avnet, Inc. — Form 10-K Summary

Period clarification: The request metadata says “2020 Q4,” but the filing is Avnet’s annual report for the fiscal year ended July 3, 2021. Fiscal 2021 included 53 weeks; fiscal 2020 included 52.

Business context

Avnet distributes electronic components and provides design, supply-chain, engineering, and related services globally. Its two reportable operating groups are Electronic Components (EC), serving primarily high-volume customers, and Farnell, serving primarily lower-volume customers. The company served customers in more than 140 countries; approximately 78% of fiscal 2021 sales came from outside the United States.

Financial performance

  • Sales: $19.535 billion, up 10.8% from $17.634 billion. Organic sales in constant currency rose 6.3%; excluding the terminated Texas Instruments (TI) line, growth was 14.8%.
  • Segment and regional trends: EC sales were $18.031 billion, up 10.3%; Farnell sales were $1.504 billion, up 16.2%. Asia/Pacific sales increased 22.4% as reported, while Americas sales declined 2.0%. Asia drove the underlying growth.
  • Gross profit and margin: Gross profit was $2.241 billion, up 8.6%; gross margin was 11.5%, down 23 basis points. Management attributed the margin decline mainly to greater Asia sales mix and, to a lesser extent, product and customer mix.
  • Operating income: $281.4 million versus an operating loss of $4.6 million in fiscal 2020. GAAP operating margin was 1.4%. Adjusted operating income was $407.0 million versus $302.9 million; adjusted margin was 2.1%, up 36 basis points. Adjusted figures exclude specified restructuring, impairment, and acquired-intangible amortization items.
  • Net income and EPS: Net income was $193.1 million, or diluted EPS of $1.93, compared with a net loss of $31.1 million, or diluted loss per share of $0.31. The fiscal 2021 effective tax rate was an 11.7% benefit, influenced by tax benefits associated with loss carrybacks and other items.
  • Cash flow: Operating cash flow was $90.9 million, down from $730.2 million. Growth-related working-capital use was $372.5 million, including increases in receivables and inventory partly offset by higher payables. Capital expenditures were $50.4 million.
  • Liquidity: Cash and cash equivalents were $199.7 million, down from $477.0 million. The company reported $1.64 billion of combined availability under its credit facility and receivables securitization program, subject to facility terms and eligible receivables.
  • Debt: Total debt carrying value was approximately $1.214 billion, including $23.1 million of short-term debt; no borrowings were outstanding under the revolving credit facility at year-end. Avnet issued $300 million of 3.00% notes due 2031 and redeemed $300 million of 3.75% notes due 2021. It reported compliance with applicable credit-facility and securitization covenants.
  • Shareholder returns: Dividends paid were $0.85 per share. No shares were repurchased in fiscal 2021; $469 million remained under the authorization, but repurchases were suspended to manage liquidity and leverage.

Material changes versus fiscal 2020

  • Sales recovered from the prior-year decline, particularly in Asia; fiscal 2020 had been affected by an industry downturn and the pandemic.
  • Fiscal 2021 sales include an estimated $306 million attributable to the extra week. The TI distribution agreement ended in December 2020; TI products accounted for approximately $292 million of fiscal 2021 sales versus $1.57 billion in fiscal 2020.
  • Fiscal 2020 operating results included $144.1 million of goodwill and long-lived asset impairment expense; no such expense was recorded in fiscal 2021.
  • Fiscal 2021 restructuring, integration, and other expenses totaled $84.4 million. Restructuring actions included reducing or planning to reduce more than 600 positions. Management expected approximately $50 million of incremental annualized cost savings from fiscal 2021 restructuring actions.
  • Operating cash flow fell substantially as receivables and inventory increased to support sales growth. The company also suspended share repurchases, while maintaining dividend payments.

Outlook, risks, and contingencies

  • The filing provides no specific quantified sales or earnings guidance. Management said it expected future operating cash flow and available borrowing capacity to meet liquidity needs, while noting uncertainty from COVID-19 and economic conditions. Near-term strategic acquisitions were considered unlikely given the uncertain environment.
  • Key risks include pandemic-related demand, supply and logistics disruption; semiconductor availability and industry cycles; intense competition and margin pressure; inventory obsolescence; customer credit and collection risk; foreign currency, trade restrictions and tariffs; cybersecurity threats; and information-system or distribution-center disruptions.
  • International trade, Brexit, inflation, and changing interest-rate benchmarks were identified as sources of uncertainty. A significant supplier risk is the potential loss or changed terms of supplier relationships; the TI agreement termination may continue to affect sales and gross profit if not offset by growth, margin improvement, or cost reductions.
  • Legal and regulatory matters include pending or potential compliance investigations, including import/export and environmental matters. Management did not expect a material adverse effect on financial position or liquidity, but said outcomes could be material to results in an individual reporting period. Estimated liabilities for reasonably estimable compliance matters were $14.7 million.
  • The company reported an estimated $145.1 million liability for unrecognized tax benefits and a $241.3 million income-tax refund receivable. The timing and realization of tax positions depend on tax authority outcomes and applicable law.
  • KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective as of year-end.

Important facts for investors to verify

  • How much of sales growth and margin performance is sustainable after adjusting for the extra fiscal week, currency effects, and the TI termination.
  • Whether working-capital investment converts into cash as demand and supply conditions evolve, and whether receivables and inventory remain recoverable.
  • Whether the expected restructuring savings are achieved and how recurring restructuring and integration costs affect reported earnings.
  • Renewal and availability of the receivables securitization program, including the expected renewal on similar terms and the role of eligible receivables.
  • Collection and timing of the $241.3 million tax refund receivable, as well as developments in unrecognized tax benefits and other legal or compliance matters.
  • Debt maturities, covenant headroom, and any resumption of share repurchases or changes to dividends.